In Centamin case, allegations of a golden contract

The shares of the London-based mining giant Centamin tumbled last week, wiping about 40 percent off its share price, after an Egyptian court ruled void the company’s rights to operate the lucrative Sukari Gold Mine.

The case against Egypt’s largest gold producer is the latest in a series of cases in which courts have called into question business contracts from the Hosni Mubarak era.

Judges’ handling of the case has left many investors unsure of how the government will treat private companies working in the country, as President Mohamed Morsy tries to present a strong front against corruption.

Centamin, dually listed on the London and Toronto stock exchanges, announced it was confident that the ruling would be resolved through an appeal process.

But, if the company’s confidence proves unfounded, experts say the Centamin case could damage Egypt’s reputation as a destination for foreign investment, as government officials desperately seek for it to return.

Centamin, in a statement issued Monday, said it would show the court documents proving the petroleum minister had approved the operation of Sukari mine, the company’s largest source of revenue.

The company’s office in Alexandria declined to comment on the case until they receive an official transcript of the verdict.

Centamin, which owns a 50 percent stake in Sukari through its subsidiary Pharaoh Gold Mines, said in early October that it was on target to produce 250,000 ounces of gold this year, after having ramped up production in the third quarter. The Egyptian Mineral Resources Authority (EMRA) owns the remaining 50 percent stake of the mine.

Centamin continues to work in close cooperation with EMRA, as both parties stand to lose if the contract is annulled.

“EMRA takes this opportunity to restate its full support of our operating partner at the Sukari Gold Mine, Pharoah Gold Mines,” EMRA chairman Fekry Youssef told reporters. “We strongly believe that the terms of the Sukari Concession Agreement are both reasonable and fair to all parties concerned.”

But, despite the reassuring statements, it would appear the gold producer is not out of the woods. Legal experts maintain there are grounds for the contract annulment, meaning the company and government could be locked in litigation or international arbitration for years to come.

Nugget of truth

The case was filed by Hamdy al-Fakharany, former member of the now-dissolved Parliament, who argued that Egypt was not receiving its entitled financial returns from the mine. He said the concession granted to Centamin had not been approved by Parliament, which was grounds for the lease to be ruled invalid.

Fakharany is famous for other lawsuits that overturned Mubarak-era deals, such as Talaat Mostafa’s Madinaty land and the Omar Effendi deal. In both cases, he alleged that public land and assets were sold for less than their fair value.

But Centamin’s case does not seem to be one of flat-out nationalization. A transcript of the verdict, which can be found on the Egyptian Center for Economic and Social Right’s website, makes it clear that the court does not intend to terminate the contract between the government, EMRA and Centamin. According to the transcript, the contract was approved by the People’s Assembly as Law 222 of 1994.

In the verdict, the court also said that Pharaoh Gold Mines was entitled to an exploration and extraction lease.

However, Khaled Ali, lawyer, activist and manager of the economic center, says the problem is not with the paperwork, but with incompetence and corruption.

He says the exploitation contract was granted to Centamin in 2005 by the head of EMRA at the time, a man not qualified to issue such decisions.

Though Ali says it is customary for the government to renew contracts without parliamentary approval, as it did with Centamin, giving it a 30-year renewal, he says that does not mean it was legal.

The court ruled the contract void on the basis that EMRA and authorities did not adequately supervise gold extraction operations, and that Egypt’s share of the profits was too low.

“The ruling sheds doubts on the real amounts and prices of the extracted gold,” Ali says. “There wasn’t any real supervision from the government over the extraction process.”

Ali adds that the lack of supervision has resulted in Egypt being cheated out of its fair share of gold profits. “Since the Sukari mine produced its first ounce of gold in 2009, the government has seen just US$19 million out of a total of $875 million in revenues,” he says.

It’s an unfair arrangement that needs to be given a second look, he asserts.

“The government has pumped about 200,000 liters of diesel each day to help the company’s operations over the last 10 years, which alone is worth $800 million,” he says. “The whole point of this case is to protect public interest and public assets.”

Pot of gold

Sukari is situated on the Arabian-Nubian Shield, which covers the northeast African countries of Egypt, Ethiopia, Eritrea and Sudan, as well as Saudi Arabia.

The 160-square-kilometer Sukari area is located in the southeastern region of the Eastern Desert, about 700 kilometers from Cairo and 25 kilometers from the Red Sea. Sukari Hill is about 2,300 meters long, 600 meters wide and 1,345 meters above sea level at its highest point.

Surrounded by wide valleys and mountain ranges, Sukari Hill has been known for its mineral wealth for thousands of years, with pharaonic, Roman and British rulers all mining there.

The name Sukari is thought to derive from the Arabic word for “sweets,” because of the area’s abundance of quartz rocks, which resemble sugar.

Mohamed El-Hennawy, a geologist and former head of the central administration of the Egyptian Geological Survey and Mining Authority, says Centamin was given approval by government officials for its Sukari operations.

Hennawy participated in the contracting process with Centamin back in 1994.

He says Centamin was the first mining company that demonstrated the ability to extract gold from Sukari mine and generate substantial revenue. The company has brought to the table both experience and know-how, he says, in addition to providing training and creating jobs.

Because of the Sukari project, Centamin has invested more than $700 million in Egypt to date, and the company has committed another $287 million for the stage-four expansion of the mine. The Sukari mine currently directly employs 1,200 people, with another estimated 3,000 employed indirectly.

“It is never an easy business,” Hennawy says. “It takes huge effort, moving mountains and considerable amounts of money to extract gold from the desert.”

Pharoah Gold Mines and EMRA were given a license in 1994 to explore the Sukari area, Hennawy says.

At first, the 1994 agreement was governed by the old mining laws, which dates back to 1956. Hennawy says this meant that exploration rights given to any foreign mining company were limited to three square kilometers.

But to avoid going into international arbitration with the company over the agreement, in 2005, Sameh Fahmy, petroleum minister at the time, granted Pharoah a 160-square-kilometer area for exploration and extraction. Tenure was granted for 30 years, with the option to renew for a further 30 years.

In 2007, Centamin’s Sukari Gold Project finished its first phase of construction, and, in 2009, the first gold bar was poured.

He says the financial terms of Centamin’s concession agreement are such: Pharaoh Gold Mines must solely fund Sukari Gold Mine, and is responsible for the day-to-day management of the company, but Pharaoh Gold Mines is entitled to recover costs and expenses from sales revenue from the mineral resources authority. In addition, Pharaoh Gold Mines will not pay any taxes or duties for 15 years, with an option to extend that for a further 15 years.

Pharaoh Gold Mines is also required to pay a royalty of 3 percent net sales revenue, and, after the deduction of recoverable expenses and payment of the 3 percent royalty, profits should be shared equally between the subsidiary and EMRA.

In the first two years the mine accrues net profit, Hennawy says, according to the contract, Pharaoh Gold Mines is entitled to 10 percent of profits, and in the following two years, it should receive an additional 15 percent. After that, the government and Pharaoh are to split profits 50–50.

Part of the reason, he says, that the government has not received much money is because the company is still recovering its costs. That stands to change soon, Hennawy says.

“The gold mine is expected to produce about 200 [million] to 300 million ounces next year, and to increase to 500 million in the coming years,” he says.

Depending on the course the case takes, Hennawy says it could spell good or ill for the country’s mining future.

If Centamin is allowed to continue to operate, mining could become a steady source of revenue, and foreign companies could rush to start their own operations here.

If the court rules against them, he says, it could scare away foreign investments that could bring the country much-needed revenue.